Close is Not Good Enough When it Comes to Real Estate Commissions

November 27, 2018

David Allen

Partner, Jaburg|Wilk Attorneys at Law

One of the most basic real estate laws, which all agents have drilled into them from the time that they first start studying to become an agent, is that all agreements for the payment of real estate commissions must fully comply with the statutory requirements for such agreements. Of course, having that knowledge does not necessarily stop agents, under certain circumstances, from failing to strictly adhere to the law. The recent unpublished decision in D/AQ Corporation, dba Daum Commercial Real Estate Services v. Intravest 2851 Kathleen LLC (Filed January 11, 2018) addresses this issue.

In this case, Daum had the listing on some commercial property, and also represented “Kathleen,” the buyer, as a dual agent. Prior to the closing, Kathleen informed Daum that she intended to sell the property after acquiring it. Thereafter, Kathleen and Daum entered into a written listing agreement giving Daum the exclusive right to sell the property on behalf of Kathleen, following Kathleen’s acquisition of it.

After the “Kathleen listing agreement” was entered into, but before the close of escrow for Kathleen’s acquisition of the property, the Seller asked Daum to reduce his commission from 2% to 1.5%. Before agreeing to do so, Daum sent Kathleen an e-mail, proposing that if Daum agrees to reduce its commission on the current acquisition transaction by .5% in order to facilitate Kathleen’s acquisition, Kathleen will “make up the difference of .5%” in the future at the close of the escrow for Kathleen’s eventual resale of the property. Kathleen responded, in writing, that she agreed to do so.

Kathleen closed on the acquisition of the property for approximately $19M, and Daum was paid its 1.5% commission. Approximately two years later, Kathleen sold the property for approximately $21.6M, with Kathleen represented by Daum, and the buyer represented by another broker. Although Kathleen paid the commission agreed to in the listing agreement with Daum, which was split between Daum and the buyer’s broker, she refused to pay Daum the additional .5% per the e-mail agreement, equal to approximately $95,000.

Daum sued Kathleen for the .5%, and prevailed at a jury trial. In reversing the judgment, the Appellate Court stressed the fact that “Arizona places ‘strict requirements’ on real estate professionals who seek to recover commissions.” To be an enforceable real estate employment agreement, it must: (1) “be written in clear and unambiguous language,” (2) “fully set forth all material terms, including the terms of broker compensation,” (3) “have a definite duration or expiration date, showing dates of inception and expiration,” and (4) “be signed by all parties to the agreement.” A.R.S. § 32-2151.02(A)(1)-(4). For purposes of rendering its decision, the Appellate Court assumed that the e-mail exchange that took place prior to Kathleen’s acquisition of the property was sufficient to satisfy requirements 1, 2, and 4. What was fatal, however, to Daum’s attempt to enforce the e-mail exchange, was its failure to comply with requirement 3; namely, that the agreement have a definite duration or expiration date. In that, the agreement merely provided that the .5% commission would be paid by Kathleen whenever she resold the property, there is no clear expiration date of the agreement, rendering it non-compliant with all four statutory requirements.

The lesson here is that while in certain endeavors there is a benefit to “coming close” to fully complying, that does not hold true when it comes to real estate employment contracts, where anything short of full and absolute compliance will provide an opportunity for the contracting party to avoid paying the commission.